With Anthony Todd, Aspect Capital
Anthony Todd, the founder of Aspect Capital, joins the podcast to discuss the trend-following investment strategy he helped pioneer almost 50 years ago including where it might be particularly applicable in today’s markets.
- What is trend-following? Quick primer (1:06);
- What makes a trend? (5:23);
- What markets does Aspect Capital trade? (7:52);
- Current opportunities (9:11):
- Fixed-income (10:09);
- Agricultural commodities (10:58);
- Price action is paramount in the trend-following model, and it can lead to closing or reversing certain trades. For example, a bond rally… (14:15);
- Wait, so is trend-following anti-contrarian? (16:11);
- Background on the guest (21:24);
- His thoughts on artificial intelligence, or AI… (28:20);
- …and on Bitcoin and cryptocurrencies (31:55).
More Information on the Guest
Nathaniel E. Baker 0:35
Anthony Todd of Aspect Capital. You’re joining us from London in the UK. Is that right?
Anthony Todd 0:41
That is absolutely correct. Very, very good to be here. Thank you.
Nathaniel E. Baker 0:44
Great to have you. And we’re going to talk about trend following. And this is something that has, it’s not a new investment strategy. But it is one that is timely, in your view. But we should probably start off and talk about what trend following is, and how it works. And you are in as good a position as anybody to discuss that, for reasons that we’ll get into later. But for now, maybe just tell us a little bit about trend following and how it’s used.
Anthony Todd 1:14
I mean, the first point to make Nathaniel, which is something you just alluded to, it’s not a new investment strategy at all, it might be unfamiliar to many listeners. But actually, it’s one of the longest established alternative investment sectors with a track record of generating performance independent of stock and bond markets going back to the 1970s. Some companies will actually can say even significantly before that. Now, in terms of trend-following itself, it actually covers a range of different approaches. So it’s always difficult to generalize, but I think there are some common features shared by many trend followers, if I can just highlight three of those. The first is that typically content follows will follow a very disciplined systematic approach. So a completely automated scientific approach, with the aim of identifying trends or momentum in markets, over periods ranging from a few days to maybe several months, medium term trend followers, medium term trend followers, will typically be looking to try to identify trends or momentum over a period of say, two to three months or longer. That will be that will be our definition that was very much contained with aspects definition of medium term trend following. The second element is that trend followers, again, typically have highly diversified in terms of their approach. So be trying to identify trends or momentum across multiple liquid markets spanning long term bonds, short term rates, currencies, stock indices, but also harder to access markets markets, such as energies, metals, agricultural soils. And then the final element is the ability for trend followers to be able to kind of capture momentum in markets where the markets are rising or falling. So whether we’re seeing positive momentum positive current trends in markets or declining markets. So you take all that together in aggregate, the fact that the book The approach is so broadly diversified, it’s not dependent just on stocks and bonds. It’s adaptive in terms of its approach, it follows the current trends, and is able to capitalize on on rising markets as well as falling markets, it’s actually no surprise that the returns are uncorrelated with stocks, uncorrelated with bonds, and uncorrelated with many other alternative investment styles.
Nathaniel E. Baker 3:39
And so the catalysts to buy or sell securities, I guess, is based on technical indicators, if I understand that correctly, or what kind of inputs goes into this?
Anthony Todd 3:50
The inputs for trend following will be price will be the price itself. And so the if you like the hypothesis, the hypothesis behind come trend following is that it’s crowd behavior. It’s crowd behavior that actually kind of drives can trends in in markets. And different participants will react to different speeds to an A, it’s a new market information. And it’s that cascading effect of different investors taking into account different information, different inputs over different time frames, is that crowd behavior. It’s that herd instinct which we see so often by markets, market participants are driven more by emotion rather than hard facts, hard scientific data, and it’s that emotional response is that herd instinct that drives the trends. So the price action we actually can see today is just very slightly it’s a tiny effect. Tiny edge in the markets will be slightly affected by what happened yesterday by what happened last week by what happened last month. And so the the main indicator the the overwhelmingly the most important input into a trend following model is going to be prices. Self.
Nathaniel E. Baker 5:01
Okay. And so when does one decide that something is a trend that is worth falling? Like, what kind of makes that that cut off?
Anthony Todd 5:10
Yeah, I mean, looking at our approach, and in particular, we apply eight different what we would call price filters. And when we can talk about a price filter, what we’re referring to is, is a statistical approach, statistical analysis of price behavior, which will try to strip out the noise in the markets, all markets have a huge amount of noise in the price action. So we apply, as I mentioned, eight different price filters over eight different timeframes. With the aim of actually constructing out that noise and try to identify the underlying behavior, the underlying momentum in terms of the market, the fastest price filter that will apply will be looking for momentum over a period of say, one week or longer. Our slowest trend following filter will be looking for contracts over a period of around six months or longer, in answer your question, so what will what will actually depend on whether we’re actually taking, say, a long position or short position? It’s the weighted sum of the signals from those eight different price filters.
Nathaniel E. Baker 6:13
Okay, got it. So fundamentally, or theoretically, at least you touched on it. The idea is not to obsess so much about outside into inputs and reversals, but to get on board when the market is clearly moving in one direction, and then ride that, I’m assuming for just for a short term, right?
Anthony Todd 6:38
As I mentioned earlier, the, actually, for us, in terms of a medium term trend for the largest program is predominantly a medium term trend following program, we’re actually kind of trying to identify trends over a period of two to three months or longer. Now, actually, we’ll be holding our winning positions, our profitable positions for longer than our short than the losing position. So in essence, what we’re doing is actually running our profits, we cut our losses. So actually, in terms of profitable positions, will be holding those typically for more than two to three months. And there’s interesting examples in your portfolio at the moment where you’ve actually held positions for well over a year.
Nathaniel E. Baker 7:18
Anthony Todd 7:19
Yeah. So when there was a sustained trend, a sustained momentum in a particular market, we can be kind of holding positions for multiple months.
Nathaniel E. Baker 7:30
Okay. That’s interesting. Now, this all begs the question, and you touched on it at the top, the various markets that that this works with, I’m assuming these are the more liquid the better. What kind of Yeah, so what markets have you do you trade Do you focus on? And more tellingly, where do you see the opportunity right now?
Anthony Todd 7:51
The markets we trade are the world’s most liquid, predominately futures markets going forward markets, spanning eight different sectors. So I mentioned earlier stock indices, long term bonds, short term rates, currencies, credit energies, metals, agricultural soils, the in terms of our largest portfolio, we trade over 189 different markets. And again, you know, all those markets, all markets are actually kind of trading very much focus on trying to actually kind of identify those markets, which are kind of highly liquid. And again, it’s one of the advantages, I think of that of trend following programs. Is that not only their ability to be able to can generate diversifying returns, but the fact that the programs themselves are highly liquid, the majority of our of our programs, the majority of investments, from institutional investors actually have daily liquidity.
Nathaniel E. Baker 8:50
So in terms of markets, where you’ve been seeing opportunity, can you talk about that?
Anthony Todd 8:57
I can highlight perhaps some kind of current opportunities. But I think it’s also important to emphasize that the trend falling itself, the position we take in any individual market is path dependent. So it says the positions we actually have hold today, they will evolve over time, depending on the trend of the market as we are trend followers, we’re not trying to, like predict a trend, we’re not trying to get ahead of a trend, we’re actually kind of following the trend in the market. So in terms of the positions we’re holding today, they may well be very different from the positions we will be holding on to in a few weeks time. Right. But just to kind of highlight a couple of the specific examples in the fixed income markets income long term bonds. Really, again, it should be no surprise to the listeners given the price action we’ve seen over the course last few months. The overall income fixed income we’re running a material come short position to highlight a particular market if you look at continue to Do us bonds, we’re running out of short position there. That short position, we’ve been consistently short of US bonds now for many, many, many months. So for the majority of last year. And again, I think it’s one of the advantages of a trend following approach. Our positions are very intuitive. If you look across all the markets, we trade in spite the fact we’re trading, as they close to come to hundreds of different markets, the positions we take in each individual market are highly intuitive. If you take a completely different example, in highlighting one that harder to access markets, which can provide valuable diversification, one of our more profitable positions, actually, so far this year, has been a long position in the sugar market. Now. So agriculture’s represent an important part of, of what we do, they can provide very valuable diversification by comparison with the stock markets, bond markets, kind of currency markets, typically those opportunities in the agricultural markets, they’re very difficult for investors to secure access to it represents them as a small but important part of the portfolio. And what we’ve actually seen this year is the beans supply disruptions, particularly coming out of the Indian come sugar market, that’s actually driven markets substantially kind of higher now for the majority of cars this year. So that’s that’s been another significant component, in terms of our performance so far this year.
Nathaniel E. Baker 11:28
Very interesting. And these have, as you mentioned, obviously, very profitable trades. I know nothing about the sugar prices. But I know that bonds have come down quite a bit, you know, for several years now. Well, early since the Fed started tightening. And but you have conviction and further upside for both of these right now.
Anthony Todd 11:46
We have come we I mean in terms of the size of position that we hold in the kind of fixed income markets. That is it? No, it’s a reasonably kind of high conviction position. But again, no, that situation can turn very quickly. And a good example would be the Silicon Valley banking crisis actually come during the course of the middle of March. So suddenly, there was a very rapid kind of shift in terms of risk appetite. Now in the in the markets, we suddenly went from a to an environment where investors were highly risk averse, and scaling back their positions in stock markets, flight for the new to safety into the kind of fixed income markets, and very quickly across our fixed income holdings, as a result of the kind of combination of first of all our faster price filters responding very quickly. But also that risk, if like that risk overlay I mentioned earlier, which is very sensitive to short term, look of changes in risk in an individual market, in a number of fixed income positions, we went from a very significant short position to flat so that that can happen that happened actually over the course of a few days now, as the fallout from the Silicon Valley kind of bank. As market conditions ameliorated, we actually can start building a short position again. And that’s my point about how it’s gonna come trend falling kind of portfolio, it’s adaptive, it’s very agile, you know, it’s responsive to the price action. And again, as I kind of highlighted during that crisis, that combination of our price filters and our volatility measures work together in tandem, to exit a substantial part of our short fixed income position. But that’s now actually been, you know, a short position has actually kind of gradually kind of grown over the course last few weeks,
Nathaniel E. Baker 13:44
it’s grown. Do you can you talk about what you would be looking for to reverse the trade?
Anthony Todd 13:54
in terms of, you know, what would cause us to change, you know, no, can change our position? It is, again, that those come two drivers, you know, one if we actually were to see, you know, a shift in current price action, if we were to actually can see a significant rally now in fixed income markets. That, of course, would actually lead to first of all our fastest filters, then our medium filters, then our slowest filters to shift position, and then again, kind of come back to that. No, no, that fast. Volatility, effectively Ken, volatility can filter, which again, would respond to any kind of sharp changes in the risk of an individual market.
Nathaniel E. Baker 14:37
Yeah, I mean, you mentioned price action and bonds, as we record this year on Tuesday, July 11. In the US bond market, at least the last couple days has have seen a bit of a rally in bonds. Yeah, especially like you look at the two year yield. It was 5% at the start of the week, and now it’s 4.88 4.89 as we record this year, but not that’s not enough.
Anthony Todd 15:02
I mean, there’s I mean, there’s some very slightly consulted data that’s actually kind of come out over the course, last 24 hours, you know, you’re absolutely right. A move like that over a small number of days, will have picked that up in terms of our measures of risk. So that will probably have led to a good select come decrease in opposition. The fact that that moves actually happened over a few days that would have affected our very fastest and negative prices also as well. But that’s just one out of eight filters, so much. So it might have actually just, you know, faded opposition vary slightly, it won’t have been sufficient to turn the position around.
Nathaniel E. Baker 15:40
Sure. You know, it’s interesting philosophical discussion here around investing. And obviously, the topic of this podcast is contrarian investing, which has a bit of a different approach than what you’re doing a contrarian approach is to see something that is, is to basically take the opposite direction from markets. And you run with the market, which, yeah, it’s kind of the end a theme to contrarian investing. But then from that perspective, maybe that is contrarian. So but, but do, but you do find that the obvious you’ve been doing this for a long time, you you find that the signal is power for the price action is powerful enough to take advantage of,
Anthony Todd 16:23
I think, I mean, I think it’s, it’s a really interesting area to come discuss, because you’re right, that actually, you know, our approach is very much to go with the momentum to go with investor flows that go with the contents of markets. And he could see us as being far from contrarian. But I think what’s what you know, what’s interesting here is actually, although we go with the momentum, the returns we generate our contrarian are deeply contrarian. So, if you look, no go back in history. You know, I mentioned over the very long term, they trend falling has this long term track record of generating performance, which is uncorrelated with stocks, it’s uncorrelated with bonds. But it’s also been able to can generate very strong positive returns during protracted market crises. So if you look at periods such as 2000 2003, the the end of the technology kind of bubble, if you look at the global financial crisis in 2008, and you look at the inflationary or no growth crisis we actually saw last year. So we see those can protracted kind of crises, there’s significant multi month declines in stock markets. Essentially, current is in conflict with fixed income markets, not last year. Rising in commodity markets, those multi month come trends provide significant opportunities through a trend following approach. So trend following was able to can generate significant positive returns during that whole period 2000 to 2003. And again, during the course of 2008. So I would say our return stream is is very much non contrarian. It’s over the long term, the correlation with stocks and bonds is zero. But it has this unusual property of being able to actually can generate strong positive returns in periods of protracted declines in stocks or bonds.
Nathaniel E. Baker 18:22
Interesting. All right, Anthony Todd of Aspect Capital, I want to take a short break, and come back and ask you some more questions about your career, and some other things but We’ll first take a quick break. If you are a premium subscriber, you did not get the break. Do not touch the dial. We’ll be right back. In fact, we already are.
Alright, welcome back everybody. Here with Anthony Todd of Aspect Capital, Anthony. This is the segment of the show where we ask our guests to tell us about themselves professionally and how they came to investing in the first place. How they came to their current station in their career. And I mentioned at the top, you’ve had quite a pretty long and illustrious career already. So take us back and tell us about your origin story, if you will, and anything else take us up to the day?
Anthony Todd 19:13
Yeah. Happily, Nathaniel. So when actually the the background and the long kind of back history and some say how I kind of ended ended up CO co founded aspect back in 1997 was I was very lucky enough to have read physics at university with Michael Adams with Marty Lueck. And now Michael, everyone Marty Lueck went straight out of university left university and immediately actually went into a Michael Adams father’s business. And Michael Evans father, actually during the 1970s had been running her know by hand as a series of medium term trend following models on liquid colored commodity markets. I mentioned right at the very start of this podcast. Have the medium term trend falling sector has a track record going back to the 1970s. There are still a number of managers around today who can point that origins in 1970s. Michael Adams father, you know, again was one of the very early kind of pioneers of this country and falling approach. Mike Adam and Marty Lueck. Left University joined Michael Adams father’s firm, and took that approach, and built a remarkable kind of piece of technology to enable them to automate the trading systems to enable them to actually research, no other kind of trading models to expand the range of models to expand the range of markets expand the range of contracting frequencies. And that business was the origins of the AHL business, which of course, is one of the most successful quote unquote managers today. Meanwhile, so, that was the kind of common link physics with with Mike Adelman, Marty Lueck. I left uni and went into the fixed income markets, joined stock broking company called Phillips and drew that was then taken over by UBS. And in my time at UBS, you know, I became absolutely fascinated by the potential for applying a systematic scientific approach to trading the markets. Now surrounded by a whole range of traders at UBS. Now, it’s clear that the most successful traders over the long term were those who actually ran a highly scientific, highly disciplined approach, not necessarily automated, but very rigorous approach in terms of the strategy they’re applying, and the risk management and income techniques that they implemented. So I was very fortunate that, you know, I said, meanwhile, No, Mike, Mike Massey. And then of course, I’m joined by David Hardy in 1987. They built a highly successful business by that stage. And in 1992, I was fortunate enough to be able to actually join AHL, you know, at that point HL had around 20 People in the firm around 200 million under management. And I work there. Absolutely love working at AHL live from 1992 to 1997, and then spun out with Marty Lueck and with Eugene Lambert, who was head of trading system development today HL and co founded aspect.
Nathaniel E. Baker 22:23
And at no point did, did you think that maybe this is this isn’t the correct way of the most profitable way of trading? That there was other things that you should consider? Yeah. Did you ever lose your faith at any point?
Anthony Todd 22:40
In over the course last 25 years? No, no, not not at all? I mean, absolutely. Not at all I’ve been, you know, I think, you know, looking over the course, last 25 years, you know, when again, we can actually kind of back test. Now, our models, it’s one of the advantages of a systematic approach, that we’re able to come take our approach and apply it over the last 30 years, 40 years and 50 years of data. So we can actually can see that over a wide range of different market environments, when people are looking at the moment about whether we’re going to be good, whether we’re going to experience over the coming months and years, are we going to see a soft landing a hard landing or no landing in terms of the global economy? No, we can actually take our approach and back tested over a range of different market environments. But I think one of the great advantages for that trend following approach, it’s highly robust, over a broad range of different market environments. And that I think has helped very much helped our conviction in the durability of of this strategy. Now, it does go through, as with any investment approach, it can go through challenging periods. And so for medium term trend following times when markets are range bound, that’s a challenging market environment. Because our trend following models, those eight fields, as I mentioned, are constantly hunting for trends which just don’t materialize. The other kind of difficult market environment is when there are very sharp inflection points against the prevailing trend. A good example of that is what we saw earlier in March. No, because this year, so yes, so over the 25 years, that that we’ve been running content funding programs that, you know, at aspect, we’ve certainly seen some challenging years, we’ve seen some challenging period. It’s, but overall, I mean, our approach has been very much one of retain that disciplined approach, avoid style, drift, avoid style drift at all costs, remain disciplined, remain conservative, thick. Continue to invest in research, continue to refine the models, but stay true to the original premise. I think it’s something we’ve seen Nathaniel over the course. Particularly come through the course of the last decade where, during the comparatives Alstom nine through 2019, it was the number of actually kind of quite challenging years during that period. And we know that a number of our competitors did actually exhibit style drift, they shifted away from that medium term trend following approach. And, you know, it was our conviction, our conviction and the durability of the strategy. That meant we just retained that very consistent approach. We continue to innovate. We continue to refine our models, we continue to add new models, and but at the same time, we retained that style consistency.
Nathaniel E. Baker 25:37
Perfectly lead into the next question, which is your thoughts on AI? And you mess you actually a systematic approach? Have you used or made use of any AI or AI type of tools yet? Do you see any promise in that as it affects your investing approach?
Anthony Todd 25:56
Yeah, I mean, we, we see. So, you know, some sort of AI or AI cover least approach we’ve have material investment in, in machine learning, we have a team that’s been building, developing running machine learning models, for now, for a number of years now. They have generated very interesting, very attractive, diversifying returns from computer trend following. So we see no, no AI and AI related new approaches as providing potentially a very strong, very interesting diversifying area of Google search for us. But, you know, again, we look at the areas being as unlocking significant opportunities for us. But we can also consider we know we have to kind of handle the area, you know, with care. You know, I mentioned earlier, Nathaniel, that I think one of the great advantages of a trend following approach is the positions we take in, you know, across every market are completely intuitive. And it’s that intuition, or there’s that intuitive approach. And that level of transparency, which investors get, which I think is of great appeal. And that’s why in terms of the application of AI type techniques, I think it’s very, very important that, again, any research we do is hypothesis led, it’s important to actually have a hypothesis about what is the market effect we’re actually trying to capitalize on. That’s very different from just throwing a huge amount of data. At add a set of Coveo models, and trusting the result, local for us, it’s very important that everything we do, everything we do in research is totally kind of hypothesis LED. So we can actually kind of understand still with our machine learning models, why we’re actually taking any position we are in any of the markets we’re trading. So He’s new. So absolutely, we’re very, very excited, very compositive, about those techniques, we use them extensively.
Nathaniel E. Baker 27:53
Well, are there any areas of the market that you think AI, that trend following doesn’t work? Obviously, the more liquid liquid ones, I think, are would be non starters, for obvious reasons. Anything else?
Anthony Todd 28:06
Yeah, I mean, where markets are, are not able to actually nickel, you know, can freely move. So if there are constraints, you know, in markets where there is strong central bank intervention in the market, you know, that actually limits the ability for crowd behavior to actually drive underlying trends. So that can be an issue for us. Liquidity you mentioned earlier, that that’s why us is, you know, is again, a kind of key concern that can be markets, which are, you know, which, you know, if you like fringe markets, you know, in a, you know, new markets, which have actually just been launched, which might exhibit very interesting trends. But know, where there is where the liquidity is either kind of episodic, it’s unreliable, was just insufficient. So those are kind of two areas that where we actually can see that we actually have to tread very carefully where our focus is on deep liquid markets, and always focuses on markets, which are if like freely floating,
Nathaniel E. Baker 29:13
you know, one area they haven’t talked about, which I, which you may not even follow very closely, but you would think that it does kind of tick all the boxes is a Kryptos. Specifically, maybe the more liquid ones like Bitcoin and ether, have you looked at that at all, or not so much?
Anthony Todd 29:29
but we do actually, in one of our programs. We trade Bitcoin and ether futures, not the underlying kind of cash markets. So no, again, consistent with what I was just just mentioning, you know, we waited what we thought was a realistic amount of time to actually consider markets mature somewhat to actually concede that there was sufficient liquidity there. We wanted to actually control the futures markets as opposed to the underlying cash market. So it’s important for us that futures markets, you know, did a come up and do sufficient liquidity there. So yes, those are come to markets that we do trade, we have relatively small exposure to them. But they do represent a part of our alternative markets program. And
Nathaniel E. Baker 30:15
anything you’re picking up there in terms of momentum right now?
Anthony Todd 30:19
In those markets, so both those markets, we are long again, you know, unsurprisingly, it’s going to give him the run up, knowing, you know, in price over the course, will since the beginning of the year. So, you know, we have a long positions in both those markets. But of course, the level of volatility in both those markets is significant. We’re also just aware, although there is reasonable liquidity there, and the size of positions, that the risk allocation we can take the markets is cautious, is relatively contained, because of potential liquidity constraints, the volatility is high. So in terms of the net position, we’re actually taking the markets, it’s relatively contained.
Nathaniel E. Baker 31:01
Very interesting. Alright. Anthony, Todd, this has been a really interesting conversation. In closing, maybe you can tell our listeners how to find out more about you. Be it websites, or social media or anything like that. I’ll also include those in the show notes. So people can click on them.
Anthony Todd 31:18
Yep. I mean, in terms of website at www.aspectcapital.com. And then you’ll also can find us on LinkedIn, as well. So both of those, we try to kind of keep investors very much, you know, very much up to date with current progress in the company developments in you know, in the company, so please do take a look.
Nathaniel E. Baker 31:42
Or not Twitter, though.
Anthony Todd 31:45
Not, not on Twitter. We’re not on Twitter, one of the things we thought about, but —
Nathaniel E. Baker 31:51
yeah, probably smart. Okay. Great, well, wonderful conversation. Anthony, thank you so much for coming on to the contrarian investor podcast today and share your insights with us. We hope you all enjoyed it. I certainly did. And with that, we look forward to speaking to you all again next time. See you then. Bye.